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Vol. 21, No. 46 Week of November 13, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Salix no longer engaged in IEP

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Salix Inc., the company selected for the construction of a Cook Inlet LNG plant for the Alaska Industrial Development and Export Authority’s Interior Energy Project, is no longer involved in the project. Instead, the project team is moving forward on a plan in which a Fairbanks gas utility, formed from the merger of existing utilities Fairbanks Natural Gas and Interior Gas Utility, would expand an existing small LNG plant that FNG owns and operates near Port MacKenzie through a company called Titan.

3-bcf expansion

The idea is to put a 3-billion-cubic-feet-per-year expansion next to the existing LNG plant, a concept that Salix had been working on with the IEP team, Gene Therriault, IEP team lead, told Petroleum News Nov. 9. During the AIDEA board meeting on Oct. 27 the board approved a resolution enabling the purchase of Salix’s pre-front end engineering and design documentation, so that the IEP team can continue to pursue the LNG plant expansion project. Apparently, that resolution represented the formal board approval of the takeover of the Salix component of the work program, and the departure of Salix from the project. The resolution does not mention Salix’s departure, nor was the departure mentioned during the public section of the board meeting. The resolution did recognize formal acceptance by the board of Salix as the preferred vendor for the LNG plant, an acceptance that Therriault explained was necessary to enable the IEP team to close its procurement process.

AIDEA already owns FNG and the Titan plant. The IEP team has been planning to sell FNG to IGU to form a consolidated utility for Fairbanks, with an agreement on that sale expected by the end of this year. It now appears that the concept for the IEP has evolved into an arrangement whereby the consolidated utility would own and operate the Port MacKenzie LNG plant, the trucking operation for transporting LNG to Fairbanks and the LNG storage and associated gas distribution network in Fairbanks.

Cost reduction

Therriault said that the departure of Salix from the project represents one of a series of moves designed to drive down project costs and hence make natural gas more cost competitive with fuel oil in Fairbanks. This would encourage more people to convert their heating systems to gas, he said. The heating system conversion rate will drive future Fairbanks gas demand and is, therefore, a key parameter in the project economics.

With current low oil prices, IEP’s target price for gas in Fairbanks, on an energy equivalent basis, is only slightly less than the price of heating oil in the city, Therriault said. And households and businesses must factor the cost of converting their heating systems to gas into their overall costs of future gas use.

During negotiations involving FNG and IGU in the spring and summer of this year concerns were expressed that what had initially been expected to be a somewhat temporary drop in oil prices appeared instead to be turning into a longer term phenomenon, Therriault explained. Then in August the IEP team approached Salix about the possibility of the company separating from the project, he said. The team was exploring ways of reducing the cost of the gas liquefaction component of the Fairbanks gas supply chain and was trying to see if some of costs associated with the LNG plant could be mitigated, delayed or avoided. But there were certain costs, such as income and property taxes, associated with participation by a for-profit corporation that could not be eliminated. And those fixed costs, spread across a relatively small number of Fairbanks consumers, would significantly push up the unit price of gas in the city, he said.

Utility operation

So, eventually the IEP team asked Salix if the company would sell the products developed so far for the LNG plant to AIDEA, a sale that has now been agreed and approved. The idea now is that the plant would be operated by the Fairbanks utility, under a not-for-profit, cost-of-service utility model, Therriault said.

Therriault also commented that IEP is squeezing other costs out of the gas supply chain through the acquisition of larger LNG trailers for hauling LNG to Fairbanks, and through the planned consolidation of the FNG and IGU LNG storage and gas distribution infrastructure in Fairbanks. The IEP team is also working with the Alaska Railroad to evaluate the rail transportation of LNG. And the IEP team is negotiating a new gas supply from a Cook Inlet gas producer for the Port MacKenzie LNG plant.

- ALAN BAILEY



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